Traditional To Roth Ira Rollover

There are several differences and similarities between a Roth IRA and a Traditional IRA. Some differences are that Roth IRA distributions are not based at all on age and that direct contributions to a Roth IRA can be withdrawn at any time.

Contributions to a Traditional IRA are tax-deductible, an advantage over a Roth IRA. Instead of waiting a couple of years for the tax benefit from a Roth IRA, you will get the tax benefit immediately through a tax deduction. Funds withdrawn before the age of 59 1/2 will be charged income tax and an additional 10% penalty on the money.

Two Roth IRA's can be combined together to make one Roth IRA in the event that one's spouse dies and leaves a Roth IRA. Rollover contributions in a Roth IRA may be withdrawn tax and penalty free five years after the account has been opened. Unlike a Traditional IRA, the tax bracket you are in when you contribute the money will be the same when you withdraw the money.

There is currently a limit on creating a Roth IRA account if your adjusted gross income is over $101,000. However, this restriction will be removed in 2010 due to a tax act passed in 2006 by Congress. With a Traditional IRA, distributions of funds must start by the age of 70 and 1/2, there is no restriction on a Roth IRA.

One would want to convert to a Roth IRA for several excellent reasons. First of all, when withdrawing funds from the Roth IRA after the 5 year period, tax does not have to be paid. Another reason to convert to a Roth IRA would be if you are planning to move into a higher tax bracket in the future and want to avoid this. Money in a Roth IRA can also be withdrawn at any age, unlike a Traditional IRA in which withdrawals would have to start at the age of 70 1/2.

There are also many benefits to a Traditional IRA that a Roth IRA does not have. If you believe that you will remain in the same tax bracket when you withdraw your money, most of the tax benefits of a Roth IRA will be annulled, as you must pay tax when you rollover your Traditional IRA to a Roth IRA. Money deposited into a Roth IRA is tax-deductible, which means you get the tax benefit right away, with a Traditional IRA, you may have to wait years for the tax benefit to show.